One of my friends drives a 25-year-old Toyota, and in many ways, it reminds me of my house.
That may seem an odd thing to say, but both cars and housing are durable goods that frequently have multiple owners over their lifetime. The difference is that driving a car more than 30 years old is an oddity; and living in a house younger than that is too. But there are other important differences that highlight some of the UK’s housing problems.
The reason my friend drives a 25 year old car is because of the cost. It’s cheaper to buy. Which is fair enough; most new cars come with full climate control, electric windows and central locking as standard, and without 40,000 miles on the clock.
With housing however, progress often appears to have been in reverse. Many of the most expensive properties in London were built when Queen Victoria was on the throne.
In fact, unlike in the motor industry where yesteryear’s high end coupe is today’s budget buy, million dollar properties in areas like Notting Hill were considered near slums 60 years ago.
The reason for this downward transfer of formerly desirable cars in the automobile industry is the turnover in supply, with the newer cars coming in near the ‘top’. Because these are sold to those who already have cars, they need to be more appealing and have better features than the cars they replace, which are then passed down the chain through Britain’s used car market. In this way demand for cars by the population is met, and the stock simultaneously increases in quality.
The housing market, however, has problems. Restrictions on building have led to a much slower turnover of the UK’s housing stock, and, oddly, much of the new housing being built is of a lower ‘quality’ than that which already existed. They have fewer of the features that people want, such as extra bedrooms, larger living areas, and, crucially, location. There are many possible reasons for this, from planning laws to regulations on building, but one that in my view fails to get enough attention is our fixation on ‘affordable housing.’
This is the idea that, rather than being larger, better situated or equipped, the new houses being built should be within the means of most of the population, even first-time buyers. Local authorities in the UK regularly mandate affordable home targets for developments. While this idea may sound appealing, it ignores the ‘ladder’ that we witness in areas such as the market for cars. Rather than leading to more housing of a higher quality, affordable housing requirements create pressures towards fewer, lower quality units.
Firstly, the units created will be of lower quality. This is fairly obvious; if they weren’t, those currently living in high-quality housing would bid up the price and they would no longer be ‘affordable’. However, what is often missed is that every ‘unaffordable’ house created (which mysteriously someone still manages to buy) also creates an ‘affordable’ home. This is similar to someone trading in their Volvo for a Range Rover. There is now a slightly cheaper Volvo on the market, and after a few more swaps even those at the bottom of the ladder can move up a rung. The difference between this and mandated affordable housing is that in the one case the rung is added at the top and everyone moves up, and in the other case it’s near the bottom and very few do. The new ‘unaffordable’ houses increase the supply for everyone; new affordable houses primarily increase it at the bottom, with all those in the middle still struggling to move higher.
The other issue was that fewer homes would be built. This is because affordable housing requirements fail to account for the underlying issue of high residential land prices. Indeed, residential land in London has been estimated to cost more than 3 times as much per unit area than that marked for industrial use. With land so expensive, it simply isn’t economical for developers to build low-cost dwellings on it.
A company like Vauxhall can be a viable business producing low to mid-price cars, while constraints on the supply of land available for housing effectively squeeze out developers who would build low-cost homes. To continue with the analogy, it is as if there was a rationing of the steel used to produce cars: only those with the highest margins would get built.
In such an environment, forcing developers to build a certain percentage of low-cost homes simply harms their bottom line. And once the rate of return on a new development becomes too low, it gets postponed or simply cancelled. This drives up prices for everyone but has the worst impact on those not on the housing ladder, who aren’t compensated by an increase in the value of their property.
A far better solution is to free up space for new builds. If the constraints on supply were decreased, such as through planning liberalisation on parts of the greenbelt, alternative business models based off a higher volume of lower margin sales would be viable again, and competition between sellers would drive down prices for all buyers.
There would be more space for new, high quality, housing to enter at the top of the market, freeing up homes lower down for new buyers or redevelopment, and speeding the increase in quality of the housing stock as a whole.
Freedom to add to supply in the car market has allowed even the poorest to own cars or vans (56% of the lowest income fifth). At the same time, the quality of vehicle has improved dramatically and continues to do so. With greater freedom to build, there is no reason the same could not happen in the housing market.
Felix Hathaway is a research assistant at the Institute of Economic Affairs
The IEA has launched £50,000 essay prize with British author and investor Richard Koch to tackle the UK’s housing crisis.
If you think you have a worthwhile idea on housing in the UK, and you can explain it in under 3000 words, then you can find the details to enter the contest at here. The deadline is the 14th of September.
